Pound sterling value hits new 31-year low against the dollar

Two minutes of chaos in Asian trading sparked the biggest plunge in the pound since the Brexit referendum, with traders saying the slump was exacerbated by Algorithm initiated sell orders, commonly termed as the “fat finger”.

The 6.1 percent drop drove sterling to a 31-year low of $1.1841. With the currency already in freefall amid concern a so-called hard Brexit is on its way, Friday’s slide took it to the weakest level since 1985. At least one electronic-trading platform recorded a transaction at $1.1378, but this is not clearly substantiated.

The extent and speed of the drop adds to signs that bouts of extreme volatility are becoming more commonplace in the global currency market as the volume of transactions dwindles and algorithmic traders pick up market share. In January, the South African rand tumbled more than 9 percent in 15 minutes before rebounding, while New Zealand’s dollar had its own flash crash last August.

So why is the Pound falling? Brexit is the pressing factor right now. Part of the reason is that Britain has long imported more than it exports, and to fill that deficit in trade the country needs foreign investors to put money into the UK.  If those investments slowdown because of international worries over Brexit, and if markets anticipate a slowdown in future, the pound will weaken. The Bank of England’s decision to cut interest rates, a move forced on the Bank by Brexit, also pushed down the pound. There are other factors involved as well, as global currencies do not move in isolation. The US Federal Reserve is gradually raising interest rates and this puts upward pressure on the value of the dollar and thus pushes sterling down further.

So is the UK economy slowing down? Investments have indeed slowed down, with overseas buyers currently putting money into British shares at roughly half the pace they were a year ago. As sterling falls the theory is that British assets, from shares to bonds to property, become more attractive to foreign investors, as they can be bought for a lower price in terms of their home currencies.

This also applies to trade in goods and services. As the pound falls, imports become more expensive for Britons - so inflation should go up - while exports become better value for overseas buyers. As prices rise, imports are expected to fall while exports should increase, reducing the deficit in trade.

The Pound may fall to $1.20 or below in the near medium term. Speculation of further interest-rate cuts by the Bank of England and policy-tightening by the Federal Reserve in December will also pressurize the sterling. Largely, many traders were skeptical that Brexit would ever actually happen, but now Theresa May appears set on the process and as more details emerge, it does look like the sterling is yet to find its bottom.